Successful Startup

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To see this at work, it is worthwhile to take a close look at what may have been the most successful startup to emerge from the Internet era, BEA Systems. BEA pioneered the commercialization of the application server, software that helps customers link different applications, databases and other software across the Internet. Banks, for example, use application server software to link their new online banking systems with their ATM networks. As more and more businesses moved such services to the Net, the demand for application servers exploded, and BEA grew right along with it, hitting $976 million in revenues last year. According to Gartner Dataquest, sales of application server software from all vendors in 2001 totaled $3.1 billion.

But as the market matures, BEA is having a more difficult time. The company is no longer competing against other startups. Instead, it's up against the likes of IBM, Oracle and Sun Microsystems. These companies are taking advantage of their size and breadth by bundling their own application server software with their hardware, services, applications and related software. Today, close to two thirds of the application servers are sold bundled with other products.

For BEA, that spells trouble: The company simply doesn't have the breadth of products to bundle with its application server software or to replace the revenue it takes in from its primary product. So BEA is losing ground. The company has hung on as the number-one seller of stand-alone application server software, with 34 percent of the market, just ahead of IBM, which has 31 percent. But IBM's sales of its WebSphere application server software grew 71 percent last year, while BEA's sales grew only 23 percent. And the market for stand-alone application servers is just 38 percent of the total market.

In the larger market for bundled application servers, BEA ranks second, with a 24 percent share, while IBM is on top, with 33 percent. Oracle was third, with 12 percent, followed by Sun, with 8 percent. BEA will probably squeak into the billion-dollar club this year, but it is unlikely to emerge as the dominant software firm in its market, as have companies like Microsoft, Oracle, SAP and even Siebel.

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